Monday, January 26, 2015

Good news from the perfect little world. German business confidence confirmed the decent rebound of the economy in the final quarter of the year. Germany's most prominent leading indicator, the Ifo index, just increased for the third month in a row to 106.7 in January, from 105.5 in December. While the current assessment component improved to 111.7, from 110.0, expectations increased to 102, from 101.1 in December.
The rollercoaster ride of German economic data could still last for a while. The conciliatory end of the year 2014, with an estimated annual growth rate of 1.5%, could take turns with rather disappointing December data. Let’s not forget that December was yet another month, strongly affected by the timing of vacation. Luckily, the year 2015 should be less sensitive to seasonal fluctuations.
Looking ahead, the German economy should enjoy a pleasant tail wind, stemming from lower energy prices, the weaker euro and rock-bottom interest rates. Over the last twenty years, German exports to non-Eurozone countries have shown a rather unique correlation with exchange rate movements. Relatively immune against currency strengthening but strongly benefitting from currency weakening. Another boost for the German economy on the back of the ECB’s QE is one of the ironies of the Eurozone. The country with the most outspoken criticism could be the biggest beneficiary. Unless German ECB critics had in mind that a recovery on the back of an external stimulus package bears the risk of further self-complacency and a resistance to start new reforms.
All in all, almost everything is put in place for another strong year of the German economy. At least in a little perfect and linear world. However, the aftermath of the Greek elections will show that perfect and linear worlds do not exist. As first German official reactions to the Greek election results this morning have shown, maybe the biggest challenge for at least German policymakers in the short run.

Thursday, January 22, 2015

Today, the ECB finally entered the global QE arena. Instead of keeping some aces up their sleeves, the ECB showed its entire hand: a fully-fledged QE programme with exact numbers; a €1.1 trillion quantitative easing programme to boost the economy. At least when it comes to the precision and details already presented today, the programme is bolder than expected.
The arguments supporting the QE decision have been known already for a long while. Low inflation expectations, negative inflation rates, disappointing results from earlier liquidity and credit-enhancing measures and an overall bleak outlook for growth are convincing arguments for the ECB to act again. According to the ECB today, additional asset purchases are needed to counter two unfavourable developments: weaker-than-expected inflation dynamics and heightened risks of a too prolonged period of low inflation.
As regards the details, the ECB announced to expand the current asset purchase programme (of ABS and covered bonds) by including government bonds. For the first time, the ECB also presented a monthly target for its purchases. As of March, the ECB will start purchasing “euro-denominated investment-grade securities issued by euro area governments and agencies and European institutions in the secondary markets”. Or in short, government bonds and supranational bonds. The ECB’s purchases will be based on the national central banks’ shares in the ECB’s capital key and the ECB plans to buy government bonds with maturities between two and 30 years. However, according to Draghi, the ECB purchases will be limited to 33% of each issuer. The statement that “some additional eligibility criteria will be applied in the case of countries under an EU/IMF adjustment programme” means that the ECB could also by Greek bonds, at least as long Greece stays in a bailout programme. Moreover, the ECB also announced to scrap the 10 basis point premium on all six remaining TLTROs.
With the amount of 60bn euro per month and the intended duration of the programme until the end of September 2016, the ECB could return the size of its balance sheet back to 3 trillion euro. Given the amount of purchased ABS and covered bonds so far, the ECB will indeed have to buy government bonds for at least around 50bn euro. Despite the hard numbers, the ECB’s commitment was at least semi open-ended as Draghi also said that QE would also continue "at least until we see a sustained adjustment to the path of inflation".
According to Draghi, the issue of risk-sharing of the purchases was not essential for the effectiveness of monetary policy. Nevertheless, the ECB had to accommodate concerns of some national central banks. As a consequence, only 20% of the purchases will be risk-shared (of which the main part would be supranational bonds), the rest not.
The impact of QE in the Eurozone is highly controversial. If there is at least one single inflationary tendency in the Eurozone right now, it is the amount of articles and opinions on the sense and nonsense of QE. Only time will tell which arguments were right or wrong. Obviously, the ECB hopes for an investment boom on the back of QE and even lower interest rates. However, whether ECB purchases of government bonds will really free new lending space at banks or through higher equity prices room for corporate investment is far from certain. Therefore, the safest bet for a positive QE impact seems to be through a weaker euro exchange rate.
All in all, it seems that the ECB hopes for a happy end of a long fairy tale of fighting the euro crisis. It all started with measures to keep the Eurozone together and has now led to a series of activity –reviving measures (just think of negative deposit rates, TLTROs, ABS and covered bond purchases). There is no guarantee that QE will work. The ECB can prepare the grounds for more investment and activity but it cannot force consumers to spend or companies to invest. This also requires further structural reforms, fiscal support and probably a longer, positive, vision for the entire Eurozone. Against this background, today’s QE announcement is historic but it was also the ECB’s last trump card. There are no more hidden aces. We have heard it often in the past but the flowery phrase that the ball is now back in the court of Eurozone governments has never been more true than today. Even worse, the ECB will not be able to pick it up again if governments try to play it back.

Thursday, January 15, 2015

It is a strange habit of the German statistical office to release GDP data for the entire past year before actually publishing fourth quarter data. According to the just released numbers, German GDP increased by 1.5% in 2014 (both calendar and non-calendar adjusted), from 0.2% in 2013. In our view, this outcome suggests that the German economy has probably grown by some 0.3% QoQ in the fourth quarter. Moreover, the statistical office also released a first estimate of Germany’s 2014 fiscal balance. While almost the entire rest of the Eurozone is still engaged in austerity policies, German public finances remain strong. According to the statistical office, Germany recorded a fiscal surplus of 0.4% GDP in 2014, leading to a new historic record of posting three consecutive years with a fiscal surplus. German austerity fetishists will love it.
With today’s numbers, the economic year 2014 can almost be filed away. It was a very special year in which the German economy sometimes showed characteristics of a small banana republic as it proved unusually sensitive to the weather, the timing of vacation and public holidays. Particularly the curse of vacation could still have some echoing effects on Q4 growth. The Christmas vacation period should have slowed down industrial production significantly in December, making a downward revision of Q4 numbers likely. Of course, on a more serious note, the economy was also affected by geopolitical conflicts in its backyard and ongoing weakness in other Eurozone countries. However, under the surface of vacation-driven volatility, the economic success story continued as unemployment remained low, employment reached a new record high and private consumption turned out to be an important growth driver.
Looking ahead, despite all public criticism, the German economy should be one of the main beneficiaries of any forthcoming QE by the ECB. Even lower interest rates should further support the housing market (the construction sector currently expects 2015 to be the best year in 15 years) and some domestic investment and further weakening of the euro is excellent news for the German export sector. Add to this extremely low energy prices, which particularly should be balm for the souls of SMEs and consumers, and it makes the ultimate stimulus package for the economy. The only downside of QE and consequently this free stimulus package is that it will probably further delay new structural reforms. But this is probably not what critics of the ECB have in mind.

Thursday, January 8, 2015

Bag of mixed data. German industrial production struggled to gain further momentum in November, dropping by 0.1% MoM, from +0.6% in October. On the year, industrial production is now down by 0.5%. The November drop was mainly driven by weaker production in the energy sector. Production in the manufacturing sector, capital goods and consumer goods continued the positive trend of the last months. At the same time, November trade data indicated that the export sector is still suffering from geopolitical tensions and Eurozone stagnation as exports dropped by 2.1% MoM, from -0.5% MoM in October. As imports increased by 1.5% MoM, the seasonally-adjusted trade balance narrowed to 17.6 bn euro, from 20.8 in October.
Today’s data provides further evidence that the German economy has not yet fully recovered from the soft spell of the summer. In fact, the German economy still counts its bruises. Nevertheless, in our view, the economy should gain more momentum in the coming months, benefitting from its very special stimulus package which almost came for free. The sharp drop in energy prices and the weaker euro exchange rate are without any doubt a blessing for the economy. An economy, which actually has reached the end of a virtuous cycle and is in need of a new boost. Preferably, from structural reforms. While new structural reforms are still needed, lower energy prices and a weak euro are the well-known gift horse, which no one should look in the mouth.
The drop in energy prices should particularly benefit consumers and SMEs. Contrary to big corporates, these are the economic players which simply are unable to strategically react to increased energy prices and which will now fully use the unexpected windfalls, to either invest or spend. Regarding the weaker euro, German exporters are traditionally amongst the main beneficiaries of all Eurozone countries, together with the Netherlands and Ireland. In fact, with stagnating prices at home and a weak currency, the export business should become attractive again in 2015.